Wow, what a week. It’s taken a little while for it all to sink in, there were a lot of moving parts over the last five trading days. Just a short warning, this week’s momentum book update will be quite long, so if you’d like to skip to the position and performance section, scroll down to the bottom, I’m about to rant a bit on several market topics.
Let’s take this in chronological order here. The talk coming into this week was all about bonds. You couldn’t escape the headlines of huge in flows to bond mutual funds, financial bloggers throwing their two cents out there about why that was taking place, and everyone trying to call a top in the treasury market. The market whipped around last Monday, but the ugly close mixed with a late rally in the long bond put me on notice.
Last Tuesday was ugly as the long bond surged, the shorts got squeezed, and equity longs ran for the hills. We found support at 1040 once again in the SPX and bounce back up to the declining 5 day moving average where we were summarily rejected, hard, on Thursday.
And just when all of the sentiment had gotten so bearish that I heard people talking about an imminent crash, the long bond broke like a fever on Friday morning. But not after some drama. Intel (INTC) came out and warned that they were going to have to lower revenue guidance for the quarter as they were seeing a slowdown in PC sales. Intel gave the market a heart attack, but the bulls seized the moment and squeezed the shorts for the rest of the day as the sentiment had just gotten way too bearish.
The SPX finished the week above the 5 day moving average, although INTC was not able to do so as well.
So let me expand on a few things here. Please, please, stop trying to short the long bond. I did call a short term reversal top last Wednesday afternoon because of a bearish technical candle, and so far that call looks correct as we’ve broken some short term support levels. But, that doesn’t mean we are anywhere near an intermediate term top. To be loading up on (TBT) for the next few years I think is insane here.
The rise in the long bond can be attributed to interest rate forces to this point, the Fed has a lot to do with this as they are trying to drive down yields in order to force banks to lend, which isn’t happening. This is a classic example of don’t fight the Fed, just don’t do it, it’s a losing battle and they have more firepower than you. I don’t care how broke we are as a country, just don’t do it.
Now the scariest part of the bond rally is that a large move down in equities due to a volatility event is not even priced in yet. If the SPX were to break 1040 and drop 100 points in a few days, you can bet you’ll see that long bond surge. Don’t rule that out.
Next, let’s talk about Intel, because this has huge bearing on the rest of the market, especially the leadership stocks that we’ve been trading to the long side for the past year or so. I warned everyone here on this blog after Intel’s last earnings report, that it was most likely a kitchen sink quarter.
What does that mean? It means that we were most likely at the top of the semiconductor cycle. I won’t go through the whole thing, but generally because of the cyclical nature of the semi industry, institutions often begin selling stock when they feel the news has gotten so good that it can’t get any better, they get in front of the next quarter. And that’s exactly what we’ve seen, Intel came out and warned that revenue for this quarter is going to fall short of their estimates. It looks like this was already baked in to the market, hence the rally on Friday after the news. Sometimes the market makes zero sense, and sometimes you can kind of tell when the market makes sense even when it seems to be doing the opposite of what the news says, you following me?
So what does this mean for us? Well, it means that all of the smaller parts suppliers are probably going to see their growth rates decline as well. That doesn’t mean they aren’t healthy or won’t be growing quickly, but as Intel goes, so will go the broader semi industry and with it many of the leading names. I would not be long tech in size here on an intermediate term basis, but as I’ve been screaming for the past few months, neither would I be short anything small/mid cap in tech.
On that note, we continue to see the tech M&A frenzy kick into high gear. It was pretty obvious this was going to take place, companies are scared that their organic growth is slowing due to the economy and the huge amount of cash is burning a hole in their books. This buying spree will continue, until we get some kind of volatility event or a change in interest rates. Don’t be short small/mid cap tech, in any way, at all, just don’t.
Next, gold. What a week the metals had as everyone rushed out of equities and even bonds towards the end. Gold is going much higher, it’s off the front pages, no one is paying any attention to it, and it’s about to make some all new time highs. My intermediate term target is still $1,300. Silver is also going to move, it broke out huge last week. I believe the miners are the best way to play this. Some believe that if the equity market tanks it will take the miners down with it, I don’t believe this is the case. They have shown an uncanny ability to be uncorrelated over the last year or so.
So, those are the major themes going on right now, let’s take a look at what’s going on in my book.
It was a very important week as I added back a lot of exposure, on both sides of the market. I’m long a good chunk of the miners here via buys in (EGO), (SLW), (IAG), and (BVN), as well as a position in silver via the (SLV). All totaled I’m about 24% long miners and metals.
My position in (RDWR) performed great this week and is breaking out of a huge cup and handle pattern. I also added (ATML) as well in the tech space. On Friday I bought a position in (VHC), they help companies like (GOOG) do VOIP and other things of that nature, a huge deal right now as Google is trying to replace your office phone with a virtual Gmail phone, very smart, and I think it works. I sold 1/3 of the VHC position up about 7% from my entry, I couldn’t resist, I’ll hang on to the rest.
Other long positions I hold now include (EW), the Indian bank I’ve been stalking forever (IBN), the tower operator (SBAC), the Colombian oil company (EC), the Chinese English language school (EDU), and a small position in the company that makes those Roombas, (IRBT).
I still hold my short in (GME), and will be doing so for a while. This company is cooked and I want a large chunk of the destruction. I’m also short (YHOO) as it looks as if investors are finally giving up hope of a takeover. If it’s not happening, would you want to buy that company? The other two shorts are (RSH) and (LIFE). You know the thesis on RSH, the life short is purely technical and looks ready for a high volatility move to the downside.
Overall I am just south of 40% long here, but as 24% of that is in the miners, I’m not highly correlated to the overall market. I think we will bounce here for a few weeks, and when everyone returns from the Jewish holidays and the beach in late September, I have a feeling that this market is going to get whacked.
For the week, the momentum book added 210 basis points of absolute return, a great week. We also picked up 260 basis points of alpha. We’re up 330 basis points for the quarter and only trail the market by 20, a huge feat for what’s taken place in this terrible market.
Nothing that I say or show on my blog should ever be considered investment advice or a recommendation to buy or sell any security. The performance numbers that I post in the momentum book should never be regarded as representative of any specific client account managed by Surfview Capital, it is there solely for educational purposes and should be treated as such.
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Disclosure: Long EGO, SLW, IAG, BVN, SLV, RDWR, ATML, VHC, EW, IBN, SBAC, EC, EDU, IRBT. Short GME, YHOO, RSH, and LIFE.